Learning Objectives
 Explain the law of demand
 Distinguish between changes in demand and
changes in quantity demanded
 Explain the law of supply
 Distinguish between changes in supply and
changes in quantity supplied
 Understand how supply and demand interact to
determine equilibrium price and quantity
Chapter 3 - Demand and Supply
1
Did You Know That...
 The average price of an apartment-sized
condominium has often exceeded the average
price of a standalone house?
 The relative physical size of items does
not determine the prices at which people exchange
them for?
 By using demand and supply you can develop a
better understanding of why relative size of an
item typically has little to do with the price at
which it sells?
Chapter 3 - Demand and Supply
2
Markets
 Markets
– Arrangements that individuals have for exchanging
with one another
– Represent the interaction of buyers and sellers for
goods and services
– Markets set the prices we pay and receive.
•
•
•
•
Automobile market
Health care market
Labor market
Stock market
Chapter 3 - Demand and Supply
3
The Law of Demand
Demand
– A schedule showing how much of a good or
service people will purchase at any price during
a specified time period, other things being
constant
Chapter 3 - Demand and Supply
4
The Law of Demand
Law of Demand
– Quantity demanded is inversely related to price,
holding other factors constant.
• Price #
Qd $
• Price $
Qd #
Chapter 3 - Demand and Supply
5
The Law of Demand
What are we holding constant?
– Income
– Tastes and preferences
– Price of other goods
– Many other factors
Chapter 3 - Demand and Supply
6
The Demand Schedule
 The demand schedule
– Table relating prices to quantity demanded
– We must consider
• Time dimension
• Constant-quality units
 Demand Curve
– A graphical representation of the demand schedule
– Negatively sloped line showing inverse
relationship between price and quantity
demanded, all else equal
Chapter 3 - Demand and Supply
7
The Individual Demand Schedule
and the Individual Demand Curve
Chapter 3 - Demand and Supply
8
The Individual Demand Schedule and
the Individual Demand Curve
Chapter 3 - Demand and Supply
9
The Demand Schedule
Individual versus market demand curves
Market Demand
– The demand of all consumers in the
marketplace for a particular good or service
– Summation at each price of the quantity
demanded by each individual
Chapter 3 - Demand and Supply
10
The Horizontal Summation of
Two Demand Curves
Chapter 3 - Demand and Supply
11
The Horizontal Summation of
Two Demand Curves
Chapter 3 - Demand and Supply
12
The Market Demand Schedule for
Flash Memory Pen Drives
Chapter 3 - Demand and Supply
13
The Market Demand Schedule for
Flash Memory Pen Drives
Chapter 3 - Demand and Supply
14
Shifts in Demand
Scenario
– Imagine the federal government gives every
student registered in a college, university, or
technical school in the United States a notebook
computer.
• If some factor other than price changes, we can
show its effect by moving the entire demand curve,
shifting the curve left or right.
Chapter 3 - Demand and Supply
15
A Shift in the Demand Curve
Suppose universities
prohibit the use of
notebook computers
Suppose the federal
government gives
every student a
notebook computer
Chapter 3 - Demand and Supply
16
Determinants of Demand
Ceteris-Paribus Conditions
– Determinants of the relationship between price
and quantity that are unchanged along a curve
– Changes in these factors cause a curve
to shift
Chapter 3 - Demand and Supply
17
Normal and Inferior Goods
Normal Goods
– Goods for which demand rises as income rises,
most goods are normal goods
Inferior Goods
– Goods for which demand falls as income rises
Chapter 3 - Demand and Supply
18
Shifts in Demand
Determinants of demand
– Income
– Tastes and preferences
– The prices of related goods
• Substitutes
• Complements
Chapter 3 - Demand and Supply
19
Shifts in Demand
Substitutes
– Two goods are substitutes when a change in the
price of one causes a shift in demand for the
other in the same direction as the price change.
Chapter 3 - Demand and Supply
20
Shifts in Demand
Complements
– Two goods are complements when a change in
the price of one causes an opposite shift in the
demand curve for the other.
Chapter 3 - Demand and Supply
21
Shifts in Demand
Determinants of demand
– Expectations
• Future prices
• Income
• Product availability
– Market size (number of buyers)
Chapter 3 - Demand and Supply
22
Shifts in Demand
The Determinants of Demand
Income: Normal Good
Price
Increase in income
increases demand
Decrease in income
decreases demand
D3
D1
D2
Q/Units
Chapter 3 - Demand and Supply
23
Shifts in Demand
The Determinants of Demand
Income: Inferior Good
Price
Decrease in income
increases demand
Increase in income
decreases demand
D3
D1
D2
Q/Units
Chapter 3 - Demand and Supply
24
Shifts in Demand
The Determinants of Demand
Tastes and Preferences
Price
Hybrid vehicles
• Increase in demand
SUVs
• Decrease in demand
D3
D1
D2
Q/Units
Chapter 3 - Demand and Supply
25
Shifts in Demand
The Determinants of Demand
Price of Related Goods: Substitutes
Price
Butter and Margarine
• Price of both = $2/lb
• Price of margarine
increases to $3/lb
• Demand for butter
increases
D1
D2
Q/Butter
Chapter 3 - Demand and Supply
26
Shifts in Demand
The Determinants of Demand
Price of Related Goods: Complements
Price
Speakers and Amplifiers
• Decrease the relative
price of amplifiers
• Demand for speakers
increases
Speakers and Amplifiers
• Increase the relative
price of amplifiers
• Demand for speakers
decreases
D3
D1
D2
Q/Speakers
Chapter 3 - Demand and Supply
27
Shifts in Demand
The Determinants of Demand
Expectations: Income, Future Prices
Price
A higher income or
expectations of a higher future
price will increase demand
A lower income or
expectations of a lower future
price will decrease demand
D3
D1
D2
Q/Units
Chapter 3 - Demand and Supply
28
Shifts in Demand
The Determinants of Demand
Market Size (Number of Buyers)
Price
Increase in the
number of buyers
increases demand
Decrease in the
number of buyers
decreases demand
D3
D1
D2
Q/Units
Chapter 3 - Demand and Supply
29
Shifts in Demand
Changes in demand versus changes in
quantity demanded
– A change in one or more of the non-price
determinants (income, tastes, etc.) will lead to a
change in demand.
• This is a shift of the whole curve.
Chapter 3 - Demand and Supply
30
Shifts in Demand
Changes in demand versus changes in
quantity demanded
– A change in a good’s own price leads to a
change in quantity demanded.
• This is a movement along the same curve.
 ∆D is not the same as ∆Qd.
Chapter 3 - Demand and Supply
31
Movement Along a Given
Demand Curve
A change in the price
changes the quantity
of a good demanded,
movement along the curve
Chapter 3 - Demand and Supply
32
The Law of Supply
Supply
– Schedule showing relationship between price
and quantity supplied for a specified time
period, other things being equal
– The amount of a product or service that firms
are willing to sell at alternative prices
Chapter 3 - Demand and Supply
33
The Law of Supply
Law of Supply
– The price of a product or service and the
quantity supplied are directly related.
• P # Qs #
• P $ Qs $
Chapter 3 - Demand and Supply
34
The Supply Schedule
The supply schedule is a table relating prices
to quantity supplied at each price.
Supply Curve
– A graphical representation of the
supply schedule
– Positively sloped line showing direct
relationship between price and quantity
supplied, all else equal
Chapter 3 - Demand and Supply
35
The Individual Producer’s Supply
Schedule and Supply Curve for Flash
Memory Pen Drives
Chapter 3 - Demand and Supply
36
The Individual Producer’s Supply
Schedule and Supply Curve for Flash
Memory Pen Drives
Chapter 3 - Demand and Supply
37
Horizontal Summation of
Supply Curves
Chapter 3 - Demand and Supply
38
Horizontal Summation of
Supply Curves
Chapter 3 - Demand and Supply
39
The Market Supply Schedule and the
Market Supply Curve for Flash Memory
Pen Drives
Chapter 3 - Demand and Supply
40
The Market Supply Schedule and the
Market Supply Curve for Flash Memory
Pen Drives
Chapter 3 - Demand and Supply
41
Shifts in Supply
Scenario
– A new method of manufacturing flash memory
pen drives reduces the cost of production
dramatically.
Chapter 3 - Demand and Supply
42
A Shift in the Supply Curve
If costs increase,
supply decreases
If costs decrease,
supply increases
If some other factor than
price changes, the only
way we can show its
effect is by moving the
entire supply curve
Chapter 3 - Demand and Supply
43
Price per Flash Memory Pen Drive ($)
A Shift in the Supply Curve
5
S2
S1
a
4
c
When supply increases
the quantity supplied will
be greater at each price
3
2
1
0
2
4
6
8
10
12
14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
Chapter 3 - Demand and Supply
44
Price per Flash Memory Pen Drive ($)
A Shift in the Supply Curve
5
S2
S1
a
4
b
c
3
When supply increases
the quantity supplied will
be greater at each price
d
2
1
0
2
4
6
8
10
12
14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
Chapter 3 - Demand and Supply
45
Price per Flash Memory Pen Drive ($)
A Shift in the Supply Curve
S3
5
S1
b
4
d
a
When supply decreases
the quantity supplied will
be less at each price
c
3
2
1
0
2
4
6
8
10
12
14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
Chapter 3 - Demand and Supply
46
Shifts in Supply
Determinants of supply
– Cost of inputs
– Technology and productivity
– Taxes and subsidies
– Price expectations
– Number of firms in industry
Chapter 3 - Demand and Supply
47
Shifts in Supply
The Determinants of Supply
Cost of Inputs
Price
Increase in cost
decreases supply
S3
S1
S2
Decrease in cost
increases supply
Q/Units
Chapter 3 - Demand and Supply
48
Shifts in Supply
The Determinants of Supply
Technology and Productivity
Price
S3
S1
S2
Decreases in productivity
decrease supply
Improvements in technology or
increases in productivity
increase supply
Q/Units
Chapter 3 - Demand and Supply
49
Shifts in Supply
The Determinants of Supply
Taxes and Subsidies
Price
S3
S1
S2
Increases in taxes or
decreases in subsidies
decrease supply
Decreases in taxes or
increases in subsidies
increase supply
Q/Units
Chapter 3 - Demand and Supply
50
Shifts in Supply
The Determinants of Supply
Price Expectations
Price
Expectations of higher
future prices decrease
supply
S3
S1
S2
Expectations of lower
future prices increase
supply
Q/Units
Chapter 3 - Demand and Supply
51
Shifts in Supply
The Determinants of Supply
Number of Firms in Industry
Price
Decrease in the
number of firms
decreases supply
S3
S1
S2
Increase in the
number of firms
increases supply
Q/Units
Chapter 3 - Demand and Supply
52
Shifts in Supply
Changes in supply versus changes in
quantity supplied
– A change in one or more of the non-price
determinants will lead to a change
in supply.
• This is a shift of the whole curve.
Chapter 3 - Demand and Supply
53
Shifts in Supply
Changes in supply versus changes in
quantity supplied
– A change in a good’s own price leads to a
change in quantity supplied.
• This is a movement along the same curve.
 ∆S is not the same as ∆Qs.
Chapter 3 - Demand and Supply
54
Putting Demand
and Supply Together
Putting demand and supply together
Equilibrium (Market Clearing) Price
– The price that clears the market
– The price at which quantity demanded equals
quantity supplied
– The price where the demand curve intersects
the supply curve
Chapter 3 - Demand and Supply
55
Putting Demand and Supply
Together
Chapter 3 - Demand and Supply
56
Putting Demand and Supply
Together
Chapter 3 - Demand and Supply
57
Putting Demand
and Supply Together
Equilibrium
– The situation when quantity supplied equals
quantity demanded at a
particular price
Chapter 3 - Demand and Supply
58
Putting Demand
and Supply Together
Shortages
– The situation when quantity demanded is
greater than quantity supplied
• Qd > Qs
– Exist at any price below the market clearing
price
Chapter 3 - Demand and Supply
59
Putting Demand
and Supply Together
Surpluses
– The situation when quantity supplied is greater
than quantity demanded
• Qd < Qs
– Exist at any price above the market clearing
price
Chapter 3 - Demand and Supply
60
Policy Example: Should Shortages
in the Ticket Market Be Solved by
Scalpers?
If you’ve ever tried to get tickets to a big
game you know all about “shortages.”
Since the quantity of tickets is fixed, the
price can go pretty high.
Enter the scalper.
Chapter 3 - Demand and Supply
61
Shortages of Super Bowl Tickets
Chapter 3 - Demand and Supply
62
Issues and Applications: The Market
Clearing Prices of Baseball Cards
 Various companies, such as Topps and Upper
Deck, print sports trading cards that provide
photos and stats on pro athletes.
 Why are some of the market clearing prices so
high?
 The answer has to do with demand and supply.
(A relatively low supply helps explain the
relatively high market clearing price.)
Chapter 3 - Demand and Supply
63
Baseball Cards with the
Highest Market Clearing Prices
Chapter 3 - Demand and Supply
64
Summary Discussion
of Learning Objectives
The law of demand says that prices
and quantity demanded are
inversely related.
– At a higher price people buy less, at a lower
price people buy more.
Chapter 3 - Demand and Supply
65
Summary Discussion
of Learning Objectives
A change in quantity demanded versus a
change in demand
– A change in quantity demanded is a movement
along the same demand curve.
– A change in demand is a shift of the whole
demand curve.
Chapter 3 - Demand and Supply
66
Summary Discussion
of Learning Objectives
 The law of supply states that price and quantity
supplied are directly related.
– At a high price firms offer more; at a low price firms
offer less.
 A change in quantity supplied versus a change in
supply
– A change in quantity supplied is a movement along the
same supply curve.
– A change in supply is a shift of the whole
supply curve.
Chapter 3 - Demand and Supply
67
Summary Discussion
of Learning Objectives
Determining market price and equilibrium
quantity
– The demand and supply curves intersect at the
market clearing, or equilibrium point.
– Surpluses exist if the price of the good is
greater than the market price.
– Shortages exist when the price of a good is
below the market price.
Chapter 3 - Demand and Supply
68